Question

ACCOUNTING FOR LEASES
  This equipment is NOT considered a specialized one.
  Start Date: January 1, 2020
  Contract term: 3 years (The contract ends on December 31, 2022.) The property title will be transferred to the tenant free of cost when the third year ends.
  Annual payments: $ 37,174 payable on January 1 of each year. The first payment was made on 1/1/20.
  Estimated useful life for the asset: 4 years.
  Estimated residual value: zero.
  Landlord's interest rate: 12%, the tenant does NOT know it.
  Lessee's incremental borrowing rate: 10%.
  The fair value of the asset is $ 100,000.
  The original acquisition cost the lessor paid for the equipment was $ 90,000.

  REQUIRED (Read carefully and only answer what is asked, otherwise you may lose points)
  1. Prepare the journal entries to be recorded by the LESSEE on January 1, 2020.
  2. Indicate the expense accounts and the amount that the lessee will report in the 2020 statement of income and expenses (account and amount).

Answer 1

1)
01-Jan-20	Lease receivable	Debit	$                        1,00,000
	Cost of goods sold	Debit	$                           90,000
	Sales A/c	Credit	$                        1,00,000
	Inventory A/c	Credit	$                           90,000

2)
Expenses
Financial charges	0
Ammortization table
Date	Installment	Interest	Principal repaid	O/s balance
01-01-2020				$             1,00,000
01-01-2020	$                              37,174.00	$                                          -	$                     37,174.00	$           62,826.00
01-01-2021	$                              37,174.00	$                              7,539.12	$                     29,634.88	$           33,191.12
01-01-2022	$                              37,174.00	$                              3,982.93	$                     33,191.07	$                     0.05

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